From IPOs To AI: Market Signals This Week.

Happy Friday. This was an important week, coming just ahead of the Fed meeting. Anxiety was high that either the PPI or CPI reports could surprise to the upside, forcing the Fed to hold back on cuts. Instead, the opposite happened. PPI came in very weak and CPI landed right in line, effectively clearing the path for at least a 25-basis-point cut next week.

Against that backdrop, we’ve continued to emphasize our tilt toward small and mid caps. Valuations remain compressed, positioning is historically light, and earnings revisions have finally turned positive for the first time since 2022. In other words, the setup is improving. This week we shared more data on why we think this part of the market could play an outsized role in the next phase of leadership.

Here is the summary if you want just that:

• Home Showings +20%.

• Small caps only 6%.

• Salesforce AI monetization strategy.

• IPO market coming back…

As you know, we’ve been gravitating toward more small and mid caps over the past 18 months and the setup is becoming clearer. Since 2022, small caps have steadily lost market share, and that’s showing up in valuations. Investor allocations to small caps sit at multi-decade lows, with ETF market share down to roughly 6% compared to 11% at the 2006–07 peak. Are we primed to rotate back? I think so.

Now the question being asked is this: with large caps being bid up and IPO activity starting to creep higher, are we in a bubble… then are small caps at risk if a “bubble” bursts? Let’s take a look at the data on next chart.

I hear the question of whether we’re in an AI bubble. My view is clear: no. AI is real. Of course, some companies won’t make it through this period, but what we’re witnessing is the foundation of the next generation of technology. The better question is, if this really were a bubble, wouldn’t small caps be hit more? The answer: not so fast. During the last true bubble in 2000, small caps actually outperformed, with far smaller drawdowns than large-cap tech through the entire unwind.

Small caps saw drawdowns of around 25% compared to losses of more than 80% in large-cap growth. Today, positioning looks similarly skewed toward larger narratives, leaving room for a potential rotation.

Also for small caps specifically, earnings revisions just turned positive for the first time since 2022.

That shift coincides with Fed funds futures pricing in nearly 150 basis points of rate cuts over the next 12 months.

The combination of falling rates and improving earnings momentum could finally provide the spark this group has been missing after years of relative underperformance.

Add in that housing data also shows early signs of improvement. Real estate showings across North America are running more than 20% higher than at the start of the year, in stark contrast to the negative trends in 2022 and 2023.

To add, consumers remain resilient as well. Bank of America card data showed household spending rising 0.4% M/M in August, with retail spending up 0.5% and services spending up 0.3%. Services continue to be the most consistent driver of growth, while gasoline remains a drag. This steady pace of spending helps offset concerns of a sharp consumer slowdown and continues to provide a floor under corporate revenues.

Lastly, I had to include an AI note. Salesforce founder and CEO Marc Benioff spoke this week, and one point stood out: we’re beginning to see how enterprises want to pay for AI. The model taking shape combines both consumption-based pricing and subscriptions, bundled together in enterprise agreements. This is an important signal of how monetization will evolve as AI adoption deepens inside the enterprise stack.

That’s all this week. Next week we get back to rates cuts!

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Avory specializes in high-conviction equity strategies, emphasizing Secular Growth and Transformation Stories driven by exceptional teams. Data guides decisions. We cater to high net worth investors, family offices, and institutional investors. Note: This information doesn't constitute a recommendation to buy or sell any mentioned securities. Avory is based in Miami, Florida with clients all across the globe.

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